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Sterling enters the new year strong after an almost unbroken rally against both USD and EUR during the last two weeks of 2021. The initial drive came from a hawkish Bank of England (BoE) stance on interest rates which was then followed by a lack of restrictions being implemented, even though many were predicting tight measures to come in after Christmas. With the BoE starting to shift their rates higher and the European Central Bank unlikely to do so for a while, analysts are expecting GBP/EUR rate to continue to rise as it did throughout 2021. In the last twelve months the rate rose by over 7% and this trend could continue into 2022. Across the globe the pandemic seems to be levelling out. Although Omicron cases are higher than ever, the death toll is not rising at the same pace which is a positive sign that we could be on our way out of it. With regards to economic data, it is a quiet set for Sterling in the first week of the year, with market PMI data this morning being the only significant piece.
The Euro enters 2022 with a similar story to where it was for most of last year – struggling against both GBP and USD. The currency has suffered a downwards trend against both currencies, with the bottom line being that interest rates are being increased elsewhere but not in the Eurozone, which points towards further Euro weakness. The ECB has suggested that in early 2022 it will reduce bond buying via its Pandemic Emergency Purchase Program (PEPP) and perhaps balance this by increasing buying via its older Asset Purchase Program; essentially making no change to the monetary policy overall. For economic data, this week’s highlight for the Eurozone is CPI figures which are out on Friday morning. These give a good indication of the change in price of goods and services and overall inflation levels across Europe. A high reading is usually seen as positive for the currency.
The dollar was the best performing currency of 2021, which doesn’t come as much of a surprise considering it is seen as the ‘safe-haven’ for currency in times of crisis. However, as we go into the new year the dollar has seemed to lose some of its gains against GBP as fears surrounding the Omicron variant dissipate. Research suggests the symptoms of the new variant are not as severe and this could be the path out of the pandemic, which has seen investors look away from USD and into other currencies. With regards to economic data, it is a busy first week of the year for the dollar. ISM manufacturing PMI data comes out this afternoon, ADP employment change out tomorrow, ISM services data out on Thursday, and non-farm payrolls out on Friday. A heavy set of data will give a good indication as to where the US economy is at and will shed some light on what to expect over the coming weeks.
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